The Budget’s still several weeks away, but the rumour mill is already churning around what might or might not happen.
Pensions are big news with an array of rumours rumbling that could affect retirees’ long-term planning.
In 2024, many rushed to take tax free cash based on speculation, but the wrong decision could leave you with a nasty tax charge.
It’s important to think before taking any action, especially based on rumours. If you’re not sure, you can take financial advice.
We look at three of these rumours and what it could mean for retirees if the Chancellor makes changes in her Budget.
This article isn’t advice. The government’s Pension Wise service can help if you’re over 50 and need guidance. You can also get personalised financial advice if you need it.
Investments can rise and fall in value, so you could get back less than you invest. Pension and tax rules can change, and any benefits depend on your circumstances. Remember, you can't usually access money in a pension until you're 55 (rising to 57 in 2028).
Tax free cash
Tax free cash has been a key area of concern – with rumours that the Chancellor is looking to reduce the amount that people can take from their pension.
It’s a theme that has continued since the last Budget with signs that people are considering taking the money out of their pension now before any change can happen.
Recently released FCA data shows the amount of tax-free cash taken in the last tax year surged in the last tax year when compared to the previous one.
Rumours can be concerning but taking tax free cash without a plan can have long-term consequences for your retirement plans.
Pensions are an extremely tax efficient way to grow your money but you can reinvest some of the tax free cash in a Stocks and Shares ISA and get investment growth alongside tax free income. However, there’s also the potential that if you invest it elsewhere it could become subject to capital gains and dividend tax.
If you keep it in savings there’s a chance it could be exposed to low rates of interest and its purchasing power gets nibbled away at over the years by inflation.
You may also plan to take the tax-free cash pre-Budget and then simply reinvest it back into your Self Invested Personal Pension (SIPP) if the change doesn’t happen.
However, this risks falling foul of pension recycling rules put in place to prevent people from benefiting from artificially high tax relief. The tax charge levied could blow a significant hole in your retirement plans. Any plans to reinvest tax free cash back into a SIPP should be approached carefully and with the assistance of a financial adviser.
Pension tax relief
The other key change that could be considered is a reduction in pension tax relief.
This could affect retirees who are still working – you can continue to contribute to a pension and receive tax relief until the age of 75.
This could be levied at a flat rate, like 20% or 30%. A move towards a 30% rate would spell good news for basic rate taxpayers as their £100 contribution would only cost them £70, rather than £80. However, it would be less good news for higher and additional rate taxpayers who currently enjoy tax relief on their pension contributions at 40% and 45% respectively.
Such a move could act as a huge disincentive for higher earners to save into a pension which could leave them badly prepared for the future.
The most recent data from HL Savings and Resilience Barometer showed higher earners are still at risk of under saving for retirement. Just 41.5% of households are on track for an adequate retirement income that would let them continue the lifestyle they enjoyed while working.
If you’re concerned about a potential cut to tax relief then it could be a good idea to make a contribution to your SIPP now to make the most of the system as it currently stands.
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Inheritance tax (IHT)
The decision to make pensions part of your estate for inheritance tax purposes from April 2027 threw many plans into disarray.
Some people had planned to spend down other assets first and leave their pensions until last as it could be passed down to loved ones free of IHT – and if death occurs before the age of 75, free of income tax too.
These plans could need re-thinking.
Signs persist that the government might continue to focus on inheritance with a potential cap on lifetime gifts being suggested.
The government might also explore the taper relief – which applies if you give away more than your nil rate bands before you die, and the rate of tax payable gradually drops between three and seven years after the gift is given.
There’s a risk however, of a heftier tax bill on the estate, leaving less to pass onto family after death.
This could lead to people gifting assets away now before changes happen to try and spare loved ones a hefty tax bill. However, giving away too much too soon could potentially leave you struggling later in life, particularly if you need care.
You must also follow the rules carefully around gifting to ensure you don’t breach any allowances and keep clear records that can be used in case of any questions from HMRC.
Our advisers can help you with planning for the Budget. Understand how inheritance tax on pensions and changes to tax relief could impact you.